Housing is about to reach a remarkable milestone: for the first time in almost 50 years there will be more private rented than social rented homes in England. It's a transformation that would have seemed remarkable to anyone in the 1960s and 1970s, when a private sector that dwindled from 4.7m homes in 1961 to 3.2m in 1971 was rapidly overtaken by a social sector moving in the opposite direction.

Even as thousands of social homes were being sold under the right to buy in the 80s and 90s, the idea would still have seemed crazy. Private renting fell to just 1.8m homes in 1991, despite the deregulation of rents and the introduction of assured shorthold tenancies in 1988, and it still sat at only 2.1m – half the size of the social sector – in 2001.

But private renting has now almost doubled in size. "The way it accelerated took everyone by surprise," says Professor Steve Wilcox of York University. Abi Davies, assistant director of policy and practice at the Chartered Institute of Housing said she "wouldn't have believed" the figures a decade ago.

Private expansion

The reasons are obvious in retrospect. The buy-to-let mortgage was invented in 1996, just as the housing market began a long boom and even the credit crunch did not stop the expansion. Private renting added a million homes between 2001 and 2007 and was set to add another million by the end of last year. Home ownership fell from 70% of households in 2001 to 65.2% in 2010, social renting fell from 20 per cent to 17.5% but private renting grew from 10.1% to 17.4%.

And the expansion seems set to continue. Two years ago property firm Savills forecast that private renting would reach 20% of households by 2020. Director of residential research Yolande Barnes is now predicting that it will hit 20% in 2013 and soar to 27% by 2020.

For social landlords and local authorities this transformation represents both a challenge and an opportunity.

Hundreds of thousands of people are stuck in the private rented sector when they would rather be owners or social tenants. At the same time government cuts and housing reforms – affordable rents at up to 80% of market levels and new fixed-term tenancies – have narrowed the gap with the private sector.

"In housing generally this is an extraordinary time," says Brian Johnson, chief executive of Moat. "A lot of the rules and conventions that we have operated under have all disappeared. Social or affordable housing or whatever you want to call it is moving much closer to private rented housing."

David Montague, chief executive of London & Quadrant, argues that the social sector must respond: "At both extremes of the market there is irreversible change. What we're seeing in the middle is a large and growing private rented sector where the rent you pay is 17% more than the cost of ownership, where 40% of homes fail to meet basic health and safety standards, and where the security offered is just six months.

"If this is the offer for future generations it's our view that it's just not good enough. As an organisation and as a sector we must respond to that housing crisis."

In Where Next, a report published with PricewaterhouseCoopers last year, L&Q explored the challenges facing the sector after the end of the current spending review in 2015. It argued that housing associations could finance an initial move into market renting from their own balance sheets backed by local authorities using public land as equity and build a track record to attract institutional investors.

Meanwhile, they could offer tenants five-year tenancies and much greater security than they currently enjoy and cross-subsidise development of affordable homes. "The housing association sector is ideally placed to set the tone and lead by example," says Montague.

New future

Others are more cautious. Abi Davies says many associations are still not sure how to make diversification viable or make it fit with the rest of their business and. Brian Johnson of Moat argues that market renting would mean increased risks for returns that are still relatively low. However, Johnson adds: "It's something I'm keeping a very close eye on and it's very clear to us that we have to understand really well what's going on in the private rented sector because the time might come when it is the right thing to do."

Gavin Smart, assistant director of research and futures at the National Housing Federation, says associations looking at market renting are very aware of the need to manage it alongside their core affordable business. But he argues: "There's a natural match between the desire of associations to offer well-managed long-term housing and people in the private rented sector who want that. The win-win is that when associations can do this and do it well they also produce a return which they can plough back into affordable housing."

In the meantime, the buy-to-let boom has resulted in 80& of private rented homes being owned by thousands of individual landlords. "We we are putting a lot of the housing stock in the hands of a lot of private individuals and their personal pensions plans," says Richard Donnell, director of research at HomeTrack. "How long term and sustainable is it? We just don't know the answers."

And there is little sign yet of long-promised institutional investment. "Despite all the talk about investment by institutions none of the UK players have yet got into it as such," says Barnes. "It is still very much a fledgling industry and we may need to see entrepreneurial property companies creating the stock and then selling it to institutions."

Private renting has in a sense come of age but it's clear that there are still some growing pains to come. A future based on individual investors and six-month tenancies hardly looks sustainable. And yet for the foreseeable future it looks like private renting will be the only tenure that is expanding. Could social landlords be best placed to help?